Cooperation and partnerships
"I think partnering is very important for us for a couple of different reasons. First and foremost, it is a way to leverage our resources. We are a small team located in a remote region – in Juneau, Alaska – so we can’t be in many places in the world, and partnering gives us access and understanding to many markets in a way that otherwise wouldn’t be accessible to us."
In February 2019, Angela Rodell – Chief Executive Officer of the Alaska Permanent Fund Corporation, and deputy chair of the International Forum of Sovereign Wealth Funds – talked to the IFSWF team about the latest developments in investment collaboration and partnerships. According to IFSWF data, sovereign wealth funds have doubled their investments with partners or co-investors in the last two years. For the Alaska Permanent Fund Corporation partnering with three categories of partners – fund managers, specialised advisers, and institutional peers – is a key strategy in its private markets portfolio.
In February 2018, the Alaska Permanent Fund Corporation, RPMI Railpen and Wafra (on behalf of the Public Institution for Social Security of Kuwait) established Capital Constellation, with an initial total commitment of $700 million. The firm was set up with the objective to fund and assist the next-generation of promising private equity and alternatives managers globally. It combines the expertise and capital base of three of the world’s premier institutional investors.
In April 2018, APFC partnered with the US quantitative fund management firm Mckinley Capital, to establish a long-only, closed-end fund to invest on stocks in emerging and frontier markets in the Middle East, Africa, and South Asia.
APFC announced two major partnerships in 2018, one in public markets – MEASA – and one in private markets – Capital Constellation. Why is working with other investors important for you?
Rodell: I think partnering is very important for us for a couple of different reasons. First and foremost, it is a way to leverage our resources. We are a small team located in a remote region – in Juneau, Alaska – so we can’t be in many places in the world, and partnering gives us access and understanding to many markets in a way that otherwise wouldn’t be accessible to us. I think, along with that, partnering (according to who you work with) has greater alignment of goals and ideas of strategies and how you hope to get out of those strategies. One of the biggest challenges in investing in funds is that you can have a misalignment, which most of the time is a misalignment of timeframe.
Is partnering with your peers more challenging than with managers, given this is a relatively new concept?
Rodell: I don’t think is more challenging per se, it’s challenging in a different way. Part of it is just understanding expectations; who is going to be responsible for doing what, what people, what resources are you putting into that, etc. It is not any worse, it is just that it takes a long time to take these things off the ground and you need to be committed to it. You also need to decide how to divorce. In real life these partnerships come to an end because one party needs to sell, or wants to deploy their capital differently. So providing for a clean exit strategy is really key in structuring these partnerships.
What do you think a sovereign wealth fund or another long-term investor can add to any partnership, apart from patient capital?
I think the other thing we rely upon those sovereign wealth partners for is what they see happening in their part of the world. For example on that Capital Constellation, RPMI Railpen bring their knowledge of the UK and European economy, we bring the US, and the Public Institution for Social Security of Kuwait bring the emerging market perspective. This is helpful because we know that headlines don’t always match with the reality of things on the ground.
What are the key characteristics you look for when choosing a partner, for example in the Capital Constellation partnership, why were RPMI Railpen and Wafra (and the Public Institution for Social Security of Kuwait) suitable partners?
You know, quite honestly, it was their willingness to sit and work out the details as a founding member of the partnership. The structure took over 18 months to close and so you have to stay committed to the overarching goal that this partnership has value. And I think, when we look at those two partners, it starts off as a general conversation like “Wouldn't it be nice if we could figure something like this out?”, “Are you interested? I'm interested in putting real money and resources at the table” and they leaned in. They stuck it out and we got to the finish line. Often it's not because we don't want to do something with partners it's that circumstances change and it can be really hard to finish.
The Capital Constellation platform is quite innovative. What was the thinking that drove you to focusing on promising private equity and alternatives managers?
Rodell: You know when we talk about emerging managers I think a lot of times we misconstrue that and think we're talking about a kid right out of college trying to raise to his or her first fund. And that's not necessarily the case. We're talking about managers who may have had a track record. They were maybe number two or number three at a fund. They've become part of a larger fund. They have a strategy, they want to pursue, but the larger fund isn't interested in pursuing that strategy. So they want to go out on their own. They bring a resumé, so to speak, to the table that speaks to their expertise to give you a sense that they could be a success. Why do you want to be in a first fund for a manager? The economics are usually absolutely the best. You get the lowest fees, a management revenue share and you get the best return splits on that as well. So there's real upside. And finally, the cheque sizes are much more in our wheelhouse given the size of our overall fund, rather than some of the larger funds who ask for big $500 million tickets for one fund. These are managers looking to raise $250 million right for their first fund. So we put together $700 million. The hope is to get you know eight to 10 good emerging managers in that first round of funding and that's the goal.
So what alerted you to that opportunity? Was it you noticing it or was it managers at the time coming to you and saying “Would this be something you were interested in” or why you were already invested in those bigger funds. How did that opportunity come about?
In all honesty the opportunity came about with me in a networking session at IFSWF annual meeting in Auckland, New Zealand talking to Kuwait and about ideas and things they were seeing things we were seeing and they were seeing emerging managers. We were in their part of the world for different reasons than we were seeing emerging managers in the United States. And it was one of those conversations where you kind of go. It feels like we should be able to do something about this. And we did it. That's exactly how it started.
Like other SWFs, APFC’s background in private markets is, almost exclusively, as an allocator to managers. Was that difficult to convince your board or your team of that approach?
First of all we have a wonderful governance structure within APFC. The board has delegated a lot of investment authority down to me and the chief investment officer and we've put in place governance structures in the creation of investment committees to detail how investment decisions get made. But most of our cheque sizes are not going to go to the board – a board only has to give approval to anything over 1% of the fund – so that means anything basically over $600 million. So, from that standpoint, we can be nimble and flexible. I think the other part of it is just sitting around the table taking it from an idea to a terms sheet. By definition, this means you get to create what you know your portfolio needs and you're not being asked to shoehorn in something that doesn't quite fit. That's the nice thing about this particular investment. In terms of moving from investing fund of funds to funds to direct investments, it comes with knowledge and time and building up a skill set within your team and getting comfortable with the asset class in general. We've been in this asset class [private equity] now for 10 years and so I think there's a lot of comfort now with the staff and the board and our ability to manage it. That's going to be unique from sovereign wealth fund to sovereign wealth fund based on what their own individual experiences and the talent that they have with their own staff.
Is the quality and quantity of investment opportunities increasing? Or are the investment opportunities simply shifting in the geography/sector, and how they can be accessed?
It is. We want to try and keep the [deal-origination] funnel as big as possible. We want to have a lot of deals coming in, we don't want to only see two or three deals a month and then be in a position where because of our asset allocation to private equity we have to take something we otherwise wouldn't invest in just to keep our allocation up. So part of this is just trying to be able to see as much as you can and having relationships with fund managers. By doing directs people think you might not see as good opportunities from fund managers because you're in competition, or they could then just give you the stuff they don't want to do. But in fact we haven't found that to be the case because by having these really good relationships with fund managers they know they can't invest in all opportunities and so they will show you a lot of interesting things.
So is this where you source most of your direct investments from? From fund managers rather than investments banks?
Absolutely. And it's a two way street. So if you want us to come into your fund 10 even though we're not in fund nine, but we were maybe in fund seven, you want to keep showing us deals because you want the relationship to be open. You want an open line of communication and the way you do that is by showing us co-investment opportunities or direct investment opportunities. And so I think that is sort of the mystique of private equity that people don't appreciate on the outside, is just how relationship driven the industry is. It's still very much as it's about you wanting to be at the top of their rolodex on those phone calls. And keeping those open lines of communication and figuring out what deals to step into, but who to call in when you're talking about those things.
Switching gears, why did you choose McKinley Capital as your partner for the MEASA Stock Fund ?
McKinley capital is headquartered in Anchorage but they have offices in Abu Dhabi. They have offices in Chicago, New York. They have an office in Abu Dhabi because they have these old relationships that date back, again it's kind of like the private equity world. So they do work in the Middle East, and so they were uniquely positioned to register in these countries and help us get this and had the quantitative capacity to put something like this together. So it's really exciting for us to launch this. Performance wise it's not doing as well as we would have liked because of the recent market volatility,. the U.S. dollar has gotten stronger and frontier markets have taken it on the chin. Having said that, it has made this investment strategy all the more attractive to us because it's even cheaper than it was a year ago and nothing has changed about the underlying economies of these countries in terms of being a place you want to be long term.
In terms of approach, because it invests in 30 countries – and only in public markets – is it a way to spread the risk?
Absolutely! It's not only spreading the risk in terms of our fund, but it also means that we're not overwhelming a particular capital market in any one of these countries, because these stock markets have very low capitalisations. They can't withstand large amounts of capital flowing into their markets. So this is also a way to get a foothold in there without overwhelming their markets and those stock prices to a large degree.
Have you managed to attract other sovereign or government funds as partners in the MEASA fund?
So we have a couple of other sovereign wealth funds that continue to show an interest. Events like Saudi Arabia being placed into the index heightens their interest in gaining exposure to the index. If you have any of these markets in your performance benchmarks, trying to then figure out how to gain access, it's much easier to come into this than it is to register yourself. The registration has already been taken care of in all these countries, which can be very difficult in some of these places. So this creates a capacity to come in without having to go through all those processes.
What’s next for APFC?
I don't know! That's what's exciting! You just never know who's going to come knocking on your door and what ideas are going to evolve. We're looking at doing some Alaska-based initiatives now in managing a programme for Alaska. The Board of Trustees passed a resolution to fund a mandate of $200 million, and we're working on that. But the beauty of these things is that they come from the most unexpected places or conversations. And part of being out there talking to people is getting ideas and I'm sure we'll have another one here soon.